Inflation returns to above 1 percent but deflation risk looms

A customer purchases steamed buns from a vendor at a market stall in Beijing

China’s consumer inflation slightly picked up in February but analysts say this is unlikely to be sustained, heightening looming deflationary risk, which will put pressure on policymakers to further ease policies.
China’s consumer price index (CPI), the main gauge of inflation, grew 1.4 percent year on year in February, the National Bureau of Statistics (NBS) said yesterday.
The stronger than expected reading quickened from the 0.8 percent gain in January, the lowest level in more than five years.
NBS statistician Yu Qiumei attributed the rebound to rising food and travel prices during the Chinese Lunar New Year holiday. Distortions caused by the timing of the Spring Festival, which fell on Feb. 19 this year, also played a part, the NBS explained.
Food prices, which account for nearly one-third of China’s CPI weighting, increased 2.4 percent year on year in February.
“The year on year CPI rebound mainly reflects distortions, but seasonally adjusted data continues to suggest downward pressure on prices,” noted a research report by China International Capital Corp. (CICC).
Nomura agreed: “We continue to expect inflation to remain relatively low and still see disinflationary pressure in the economy”.
During an interview yesterday on the sidelines of the annual session of China’s top political advisory body, central bank vice governor Yi Gang said China’s CPI will remain positive in the foreseeable future.
“The authorities are closely watching the index, and Japan and Europe face higher deflation risks,” he added.
Since 2014, major economies have stepped up monetary stimulus measures in efforts to counter deflation and boost sluggish economic growth.
China’s producer price index (PPI), which measures wholesale inflation, plunged 4.8 percent year on year in February, marking the 36th straight month of decline, pointing to continuing weak market demand.
Analysts said the PPI decline can hardly bottom out in the absence of significant improvements in property investment and overcapacity problems.
Dragged down by a housing slowdown, softening domestic demand and unsteady exports, China’s economy grew 7.4 percent in 2014, the weakest annual expansion in 24 years. And a string of economic indicators for the new year, including manufacturing and trade data, all suggested continued weakness.
To try to arrest the economic slowdown, China’s central bank announced on Feb. 28 it would slash the benchmark deposit and loan interest rates by 25 basis points, the second such cut in three months.
Previously, it had lowered the reserve requirement ratio (RRR) for banks to inject more monetary to the economy
But analysts largely believe more such easing moves will be needed.
“The deflation risk has put more pressure on the central bank to further cut interest rates and the reserve requirement ratio,” said the CICC report.
Nomura forecast an interest rate cut in the second quarter and three RRR cuts over the course of the year.
The annual government work report, delivered by Premier Li Keqiang at the opening of the national legislature’s annual session, set this year’s economic growth target at around 7 percent and inflation control target at around 3 percent. Xinhua